Time Warner's Talk of AOL Spin-Off Stirs Hope for Internet Unit's Future

By Mike Musgrove
Washington Post Staff Writer
Thursday, April 30, 2009

Nearly a decade ago, the merger between Time Warner and America Online was heralded as a surprising and revolutionary marriage between "old media" and "new media." By comparison, yesterday's revelation by Time Warner that divorce papers may be on the way came as a shock to almost no one.

Analysts said the two companies were ill-suited from the beginning. AOL's role had never been clearly defined. And Time Warner's recent move to replace AOL's top two executives had been widely seen as indication that major changes were coming for the struggling Web portal.

A quarterly report filed yesterday contained the first explicit acknowledgment that Time Warner's relationship with AOL, once the powerhouse of the Northern Virginia tech community, is nearing its end.

"Although the Company's Board of Directors has not made any decision, the Company currently anticipates that it would initiate a process to spin off one or more parts of the businesses of AOL to Time Warner's stockholders, in one or a series of transactions," Time Warner wrote in its report to investors.

Tech industry pundits saw the potential move in relatively positive terms for the former dial-up Web access giant, which trails competitors like Google, Microsoft and Yahoo in Web search traffic and advertising.

"At least this gives AOL some independence from a bad situation," said independent industry analyst Rob Enderle. "Where they are right now is purgatory; right now they're stuck. With Time Warner putting them on their own, there's a chance that they'll be able to rebuild a business."

Tuna Amobi, an analyst at Standard & Poor's, agreed and said that a split from Time Warner could free up AOL to strike a wider range of strategic partnerships. "On balance it's a good thing because it allows AOL to be valued as a stand-alone entity," he said. "There is no benefit for them to be part of Time Warner."

Still, both analysts pointed out, the problems at AOL are deep. The company's revenue fell 20 percent last year to $4.2 billion, a drop AOL blamed on a decline in Web advertising. Time Warner said it was AOL's poor performance that led to the media conglomerate's 14 percent drop in revenue during the most recent quarter, down from the year-ago period.

The company also laid off thousands of workers over the years in an effort to reduce expenses. This year, AOL reduced its headcount by 700 workers, or 10 percent.

When the two companies merged in 2001, the idea was that the then-giant AOL, boasting 22 million paying subscribers, would benefit from owning rights to Time Warner's vast portfolio of content, ranging from CNN to People magazine. At the same time, Time Warner, whose attempts to enter the Web era had resulted only in failure, was expected to lend stability to a fast-growing Internet company. Few benefits ever arose from the pairing, and even AOL founder Steve Case, once a champion and driver of the merger, has been saying for years that he believes the two companies should be separated.

"The worst place to be is in the middle of the road, and that's where AOL has been the last few years," said Case, who left the company in 2005.

With its "buddy lists" and "community sites," AOL invented some of the concepts of online social networking that are at the core of the Web's hottest companies right now, he said recently. But the company failed to adequately capitalize on those ideas, as sites such as Facebook have signed up hundreds of millions of new users in the span of a few years.

Former Google executive Tim Armstrong was named to the top leadership of the AOL unit in March. At an all-hands meeting that month with AOL staff he exhorted the company to "get America back online" and said that AOL's Dulles office, the company's original headquarters, would be at the heart of a new wave of innovation.

"There are some real, incredible things happening under the surface that people don't realize about AOL and I think those are the things we are going to build on," he said at the meeting. "I think the road to putting America back online starts right here in Dulles, Virginia."

Yesterday afternoon, an AOL employee at a nearby Ashburn bar expressed hope that the company would find its direction again under the new leader and sounded unfazed by the latest news of Time Warner's intentions. The employee spoke on condition of anonymity because he was not authorized to comment.

"Morale is as strong as it's been in a while," he said.

Staff writers Cecilia Kang and Kafia A. Hosh contributed to this report.

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